The Institute for Energy Research is a not-for-profit organization that conducts intensive research and analysis on the functions, operations, and government regulation of global energy markets.

About IER
Latest Analysis
August 14, 2014

Does Senator Markey Want Higher Energy Prices?

August 14, 2014
Print Friendly

Senator Edward J. Markey provided the Institute for Energy Research (IER) with questions for the record after the hearing he held on “U.S. Security Implications of International Energy and Climate Policies and Issues” on July 22, 2014, Subcommittee on International Development and Foreign Assistance, Economic Affairs, International Environmental Protection, and Peace Corps; Senate Committee on Foreign Relations. IER, in turn, has compiled a set of questions for Senator Markey that are listed below.

1. Why should the taxpayers subsidize wind projects when commercial wind generation is more than 100 years old? Shouldn’t wind be able to stand on its own by now, rather than being paid 2.3 cents per kilowatt hour generated? How much longer should taxpayers subsidize wind generation? 

2. For example, even though Massachusetts has a law mandating renewable energy production, offshore wind generation has had a problem getting off the ground there due to its high cost. So, 13 years since the Cape Wind project was first proposed, the project needs to be saved by the government. The Department of Energy (DOE) has come to the rescue with a $150 million loan guarantee. That loan guarantee, which Energy Management Inc., Cape Wind’s developer, first applied for in 2009 when combined with its other project financing from French financiers, a Dutch bank and the Japanese, however, will only give Cape Wind 58 percent of the $2.5 billion it needs to construct 130 wind turbines offshore in the Nantucket Sound.  Do you believe it is a sound use of taxpayer’s money to guarantee a loan since so far, its backers have only been able to secure private funding combined with the government loan guarantee which will only finance 58 percent of Cape Wind’s cost?

3. The two largest utilities in Massachusetts have agreed to purchase 77.5 percent of the electricity generated by Cape Wind at a starting price of 18.7 cents per kilowatt hour, well above the average wholesale price of electricity. The Energy Information Administration estimates the cost of offshore wind power will average 20.41 cents per kilowatt hour and could be as high as 27.1 cents per kilowatt hour – over 3 times the cost of a new natural gas combined cycle unit. Although Cape Wind’s starting price is less than EIA’s prediction, the price of Cape Wind’s power will end up 50 percent higher than EIA’s prediction, as the price is set to automatically increase at 3.5 percent per year accordingto the terms of a 15-year deal signed originally with National Grid, the state’s largest utility.  If the project is really “a go,” this would be the nation’s first offshore wind farm, and it will end up providing expensive, unreliable electricity to the residents of Massachusetts. Do you believe your constituents should be forced to pay for electricity that is 3 times the cost of the alternative new sources of electricity generation?

4. NStar, the second largest electric utility in Massachusetts, was holding out for less expensive onshore renewable energy to fulfill its state renewable mandate, but appears to have been pressured into buying power from Cape Wind. NStar agreed to pay the excessively high price for power from Cape Wind in order to gain state approval for its merger with Northeast Utilities. In January, however, the Town of Barnstable, three Cape Cod businesses, and the Alliance to Protect Nantucket Sound filed a lawsuit in the U.S. District Court in Boston, contending that the state had discriminated against out-of-state utility companies by putting pressure on NStar to buy the offshore wind power in an agreement it had brokered in 2012. While a federal judge dismissed the lawsuit, finding that the plaintiffs were constitutionally prohibited from suing the Commonwealth of Massachusetts in federal court, the Alliance to Protect Nantucket Sound plans to appeal and wage other challenges related to the project’s environmental impact. Do you believe NStar should be pressured into buying power for its customers from Cape Wind when it can fulfill its state mandate for renewable power from less expensive onshore renewable energy?

5. The Obama Administration has a goal of reaching 10 gigawatts of offshore wind by 2020 and 54 gigawatts by 2030—a goal set in 2011 that is an enormous stretch for such high cost electricity. Proponents of offshore wind technology like to point to European offshore wind projects asexamples, but residential electricity rates in Europe are about 3 times higher than they are in this country—in part because of expensive wind and solar projects. Do you support increasing electricity rates in the United States to be more like Europe’s rates?

6. Cape Wind has been opposed by organizations and individuals citing the following problems: ruining ocean views from homes and beaches, lowering property values, hurting the fishing and yachting industries and marine life, being too close to shipping lanes, privatizing of public property, and ruining the ancient religious rituals of the Wampanoag Indian tribes. Clearly, when it comes to energy projects, there is a lot of “NIMBYism” (not in my back yard). Do you believe that these are issues that should be addressed before construction begins?

7. Another issue is that the lucrative production tax credit for wind power has expired and it is unclear whether Congress will renew it.  The tax credit is worth at least 2.3 cents per kilowatt hour to wind developers and in many cases is the only reason investors build wind farms. As Warren Buffett recently said, “For example, on wind energy, we get a tax credit if we build a lot of wind farms. That’sthe only reason to build them. They don’t make sense without the tax credit.” Is extension of the production tax credit, another taxpayer-funded subsidy, needed to make Cape Wind a viable project?

8. EPA’s carbon dioxide limits for its existing power plant rule will reduce temperatures by 0.018 degrees Centigrade by 2100 according to the model the EPA uses which is based upon the IPCC’s modeling. Do you support this rule despite the lack of benefits? On June 2, 2014, Environmental Protection Agency (EPA) released its proposed rule mandating carbon dioxide emission cuts for existing power plants. This rule is designed to comply with the president’s plan to make electricity rates “necessarily skyrocket” by reducing the use of coal-fired electricity generation from existing power plants—one of the cheapest sources of electricity generation. While the rule will result in increasing electricity rates, the rule will not have any material climate benefit despite the fact that the climate is the justification for the rule. According to EPA’s analysis, even though this rule is supposed to be about climate and temperature, there are no meaningful climate or temperature benefits. In a 654-page rule, EPA failed to devote a single sentence explaining the climate benefits. In prior studies, EPA calculated the climate impacts of their rules on carbon dioxide using EPA’s MAGICC model. To remedy EPA’s omission by using EPA’s MAGICC model , the Cato Institute calculated the projected climate benefits of EPA’s rule finding the temperature reduction from the proposed rule to be a mere 0.018 degrees Centigrade by 2100. This is a projection based upon computer models that have overestimated observed temperature change for almost 17 years.  Even so, the Cato analysts point out that they are not even sure how to put such a small number into practical terms because the number is so small as to be undetectable, which surely is why EPA did not bother to include it in its analysis.

9. Are you concerned about EPA’s lack of climate analysis in their carbon dioxide regulation for existing power plants? In Massachusetts v. EPA, the Supreme Court was concerned about the climate impacts of carbon dioxide emissions. For example, the Court stated, “the rise in sea levels associated with global warming has already harmed and will continue to harm Massachusetts.” In the carbon dioxide regulation for existing power plants, however, EPA failed to analyze the impact of the regulation on sea level rise. This is an obvious omission because in EPA regulations of carbon dioxide emissions from vehicles, EPA analyzed the impact on sea level rise. Are you concerned that EPA has failed to carry about the analysis of the harm that the Supreme Court was concerned about in Massachusetts v. EPA?

10. The U.S. Chamber of Commerce commissioned a study that looks at the economic and energy impacts of a policy that would meet President Obama’s stated greenhouse gas emission reduction goals. The study indicates that to reduce carbon dioxide emissions from power plants by 40 percent below 2005 levels by 2030 would result in 224,000 jobs lost on average each year through 2030,more than $50 billion in average annual GDP loss through 2030, with a peak GDP loss of almost $104 billion in the year 2025,$289 billion in additional cumulative electricity payments by consumers from 2014 through 2030,a cumulative reduction of $586 billion in disposable income from 2014 through 2030, and $480 billion in cumulative compliance costs by electricity providers through 2030. While the Chamber of Commerce’s study produced higher greenhouse reductions than EPA’s proposed rule requires, the cost is clearly high.  Do you support EPA’s proposed power plant rule even though the costs are high while the temperature benefits are miniscule?

11. According to the Chamber of Commerce study, the average undiscounted economic cost to achieve each ton of emissions reduction is $143 per ton of carbon dioxide reduced. That figure is 74 percent higher than the $82 per ton estimated by the Energy Information Administration in its analysis of your cap-and-trade bill that was cosponsored by Representative Waxman. The economic cost for each ton of reduced carbon dioxide in this analysis also exceeds the social cost of carbon (SCC) estimates developed by the Administration’s Interagency Working Group on Social Cost of Carbon in 2013. Based on the average SCC from three integrated assessment models at discount rates of 2.5%, 3%, and 5%, the Working Group estimated that by 2030, the SCC will be between $17 and $82 perton (in 2012 dollars). Applying the same range of discount rates, the average cost in this analysis ranges from $153 to $163 per ton over the forecast period, which is indicative of the tremendous cost of the proposed EPA regulation, which forfeits far more economic growth per ton of avoided emissions than is justified by the Administration’s own “cost of carbon” calculations. Based on this value of the cost of ton of carbon reduced, do you feel that the proposed EPA power plant rule is a cost-effective means of carbon dioxide reduction?

12. Other countries have tried their hand at greenhouse gas reductions and have found that they reduce growth in their economies, put hardship on their citizens, and do little good on the world scene of global reductions. Australia, Russia, and Japan are a few of the countries that are pulling back from their carbon-reduction commitments, according to the World Bank. Russia, Japan and New Zealand renounced the emission-reduction pact’s second commitment period covering the eight years through 2020. Recently, Russia indicated that the UN-endorsed goal of capping rising global temperatures shouldn’t dictate countries’ emission limits in a new climate treaty for 2020. Japan reneged on its original 25 percent reduction from 2005 levels in 2020 to a 3.8 percent reduction in emissions. This change means that by 2020, Japan’s emissions will have increased by 3.1 percent above 1990 levels, adding another 356 metric tons of carbon dioxide equivalent per year to the atmosphere. Last month, Australia’s government repealed its 2-year-old carbon tax that was hurting its economy by making it globally uncompetitive and increasing its electricity prices. Australia found that repealing Australia’s carbon tax on July 1, 2014 would:

  • Reduce the average cost of living across all households by about $550 than they would otherwise be in 2014 to 2015.
  • Lower the cost of retail electricity by around 9 percent and retail gas prices by around 7 percent than they would otherwise be in 2014 to 2015 with a $25.40 carbon tax.
  • Boost Australia’s economic growth, increase jobs and enhance Australia’s international competitiveness by removing an unnecessary tax, which hurts businesses and families.
  • Reduce annual ongoing compliance costs for around 370 entities by almost $90 million per annum.
  • Remove over 1,000 pages of primary and subordinate legislation.

Based on this evidence of failed policies from around the world tried by a number of our allies and fellow governments, do you believe that the United States should undertake such policies? If so, what are the benefits?

13. China is the largest emitter of greenhouse gases in the world and forecasts by the Energy Information Administration expect those carbon dioxide emissions to almost double between 2010 and 2040. Further, China’s carbon dioxide emissions are expected to be 2.6 times higher than those of the United States in 2040. China is building coal-fired plants at breakneck speed and 50 coal-to-gas facilities to improve its economy and provide power for its citizens. They are also building dozens of nuclear power plants and extensive additions to their already largest-in-the-world hydroelectric generating system. Other developing countries in Africa and Asia are also planning to use coal generating technologies even though President Obama has indicated to the export-import bank that coal facilities should not be constructed unless they have carbon reduction equipment. Japan and Germany are both constructing coal-fired plants without this equipment for the technology is not commercially available. In light of the intentions of other countries to continue with the construction of coal-fired facilities without carbon, capture and sequestration equipment, do you believe that it is fair to ban coal plants from the United States when this equipment is not commercially available and other countries are not following through with the commitment?

14. If electricity prices in the United States go up substantially and result in reduced economic growth and dynamism, while other countries like China add capacity of all kinds to run their factories and drive economic growth in their countries, is that good for U.S. national security? 

Print Friendly

View Comments
Back to top